The Gazette

Property protection and other will trusts

Jennifer Russell, solicitor, outlines the trusts that are increasingly being incorporated into wills.

There are many reasons why a person making a will (the testator) may wish to incorporate
a trust, including:

to protect young or other vulnerable beneficiaries

to ensure that assets are safeguarded within the family

to maximise tax reliefs

There are three main types of trust that are commonly included in wills.

Bare trust

This is a simple type of trust, where trustees manage the trust assets until the beneficiary
reaches the age of 18, at which point the assets belong to the beneficiary outright
and the trust ends.

Discretionary trust

Here, the trustees have wide discretion as to when and how to make payments from the
trust fund. The testator names a range of beneficiaries who can potentially benefit
from the trust, but the trustees decide who actually benefits. They will usually be
guided by the testator’s letter of wishes, but this is not legally binding.

The trustees therefore have great flexibility, so can take into account the situation
at the testator’s death, such as the beneficiaries’ circumstances and the relevant
tax rules – which may be different from when the will was made – and adapt the way
that the trust is used accordingly. For example, the trustees can ensure that any
distributions from the trust do not prejudice a beneficiary’s entitlement to means-tested
benefits.

Discretionary trusts can also be useful in maximising tax exemptions and reliefs,
including ensuring that couples who have been widowed can benefit from more than two
nil-rate bands, and crystallising inheritance tax reliefs, such as business property
relief and agricultural property relief, which may not apply by the time the survivor
dies, thereby saving tax.

Life interest trust

With this type of trust (also known as an interest in possession trust), a beneficiary
(the life tenant) has the right to receive the income from the trust assets. If the
trust contains cash and shares, this will be the interest and dividends, and if the
trust contains a residential property, this will entitle them to occupy the property
rent-free, and receive the rents if it is let. After the life tenant dies (or an earlier
date, as may be stipulated), the trust assets pass to other named beneficiaries.

This type of will is popular with couples, especially those with children from previous
relationships, who want to provide for their spouse or partner, but ensure that their
assets ultimately pass to their children. Without the trust, there is a risk that
the survivor may remarry, give away assets, or make a new will in which the children
will not benefit from the assets. The trust can also help to preserve assets if the
survivor requires long-term care.

Property protection trusts

Property protection trusts are a type of life interest trust where the only asset
within the trust is the deceased testator’s interest in their home. The couple must
own the property as tenants in common, rather than joint tenants, to enable the share
of the property belonging to the first to die to pass into the trust, rather than
passing automatically to the survivor.

This type of trust appeals to clients who want to ensure that their spouse or partner
is secure for the rest of their life (as they have the right to occupy the property,
and usually the rest of the estate will be left to them outright), but have the assurance
that at least their share of the property will be protected to ultimately pass to
their children.

As well as safeguarding the children’s inheritance in the event of the survivor remarrying,
giving assets away or making a new will, this type of will shields the deceased’s
share of the home from being assessed as capital available to pay for the survivor’s
care fees, as it is not owned outright by the survivor. The gift of the property interest
to the trust cannot be clawed back by the local authority under the deprivation of
capital rules, as could be the case if a person gives away their property (either
outright to children or to a trust) while they are alive.

Using a trust offers the survivor more protection than leaving the share in the property
to the children outright, as if any of the children become bankrupt, divorced or die
while the survivor is alive, a sale of the property could be forced to make the child’s
share of the property available to creditors, the court or executors. In addition,
there will not be any capital gains tax on the share of the property held by the trust,
as the trustees can claim principal private residence relief as a result of the surviving
partner’s right to occupy, which would not be available if it was owned by a child
who did not occupy it.

Property protection trusts can incorporate flexible powers, for example, a power to
give capital from the trust to the survivor, if required. It is also possible for
the survivor to move house.

With the cost of long-term care and life expectancy continuing to rise, people are
increasingly looking to property protection trusts to protect their homes for future
generations.

About the author

Jennifer Russell is a wills, tax and estates solicitor at Wright Hassall.

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